Charge-off

Legal consequences of a charge-off

While a charge-off is considered to be "written off as uncollectable" by the lender, the debt is still legally valid and remains so after the fact. The creditor has the right to legally collect the full amount for the time period permitted by the statute of limitations applicable to the location of the financial institution and the consumer's residence. Depending on the location, this period may be a certain number of years (e.g. three to seven years) or, in some places, indefinite. Methods of collection that can be used include contacts from internal collections staff, outside collection agencies, arbitration, or a lawsuit.

United States

Tax regulations

In the United States, federal regulations require creditors to charge off installment loans after 120 days of delinquency, while revolving credit accounts must be charged-off after 180 days.

The purpose of making such a declaration is to help support a tax deduction for bad debts under Section 166 of the Internal Revenue Code. In that respect it is a form of write-off. Bad debts and even fraud are simply part of the cost of doing business. The charge-off, though, does not free the debtor of having to pay the debt.

Effects on credit report

A charge-off is one of the most adverse factors that can be listed on a credit report. It will then be listed as such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt. This may make obtaining any unsecured or even secured credit more difficult.

If the charge-off has been paid in full, it will be listed on the credit report as "paid in full". If settled for less than the amount due, it will be listed as "settled". Even such a listing on a credit report can be negative.

Effects on banks

As the number of charge-offs climbs or becomes erratic, officials from the bank's regulators take a close look at the finances of the bank. They may impose various operating restrictions on the bank, such as stricter capital requirements or intensified supervisory examination programs. In the most extreme cases, where credit quality declines and capital adequacy is compromised, regulators may close the bank entirely to protect the financial system.

References

References

1. Cackley, Alicia Puente. (2009). "Credit Cards: Fair Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace and Use of Technology". United States [[Government Accountability Office]].
2. (8 March 2007). "What is a Charge-Off? | the Truth About Credit Cards".
3. "Bad Debts and Charge-Offs".
4. "Here's How Paying a Charge-Off Will Affect Your Credit Score".
5. "2026 Banking and Capital Markets Outlook". Deloitte Insights.
6. "ECB-SSM Annual Work Programme 2026". PwC Legal.
7. "The implementation of IFRS 9 impairment requirements by banks". KPMG International.
8. "Technical Accounting Guide: IFRS 9". PwC.
9. "Deloitte Roadmap: Accounting for Debt". Deloitte.
10. "The New Proposed Bad Debt Regulations". KPMG.
11. "Allocation of Payments in Insolvency". KPMG.